SHIP LEASING TRANSACTIONS · 2020-02-13 · Three Main Different Types of Leasing Structures •The...

SHIP LEASING TRANSACTIONS

Introduction

• Since the 2008 financial crisis, it has been a very turbulent and highly-fluctuating period for the shipping industry.

• The banking industry is now heavily regulated and scrutinized. Risk management and KYC assessment is of paramount importance to all Banks.

• Many traditional banks have sought either to leavealtogether the shipping finance sector or drastically reducetheir exposure thereto.

• It was only a matter of time for the shipping industry torespond and search for alternative means of financing.

• Ship leasing finance has, to a degree, filled the gap inavailable credit caused, inter alia, by the abovementionedconditions.

Introduction

Three Main Different Types of Leasing Structures

• The Finance Lease

• The Operating Lease

• Sale and lease-back

We shall examine first the concepts of the finance and operating leases in conjunction and then, separately, focus on the lease financing mechanism of sale and lease-back, which in our view constitutes nowadays the most popular lease financing mechanism.

Operating vs. Finance Lease

• The extent to which the risks and rewards lie with thelessor or the lessee.

• A lease is classified as a finance lease if it transferssubstantially all the risks and rewards incidental to theownership of the vessel to the lessee.

• A lease is classified as an operating lease if it does nottransfer substantially all the risks and rewards incidental tothe ownership of the vessel to the lessee.

The Operating Lease

• The lessor / owner typically maintains ownership at theend of the lease.

• The lessee (usually) has considerable (within reasonability)discretion to terminate the lease.

• The possession and use of the vessel revert back to thelessor / owner (at the end of the lease).

The Finance Lease

•Title of ownership may or may not be eventuallytransferred to the lessee at the end of the lease.

•Ultimately however, whether a lease is a financelease or an operating lease, depends on thesubstance of each particular transaction, alwaysexamined on an ad hoc basis.

Sale & Lease-back

• The essence of a sale and lease-back transaction is that a ship-owningcompany (“A”) sells its vessel to another company / SPV (“B”), whichthen leases it back to A for A’s use.

A = becomes the (‘ship-owner’) ‘lessee’.B = becomes the (‘financing’) ‘lessor’.B is typically a leasing company / house or even a private equityfund.

• It is not unusual to see a purchase obligation (not merely an option) atmaturity.

Sale & Lease-back

• The expansion of Chinese leasing companies into thismarket has accounted for much of the recent growth.

•However, there are many other lessors based elsewherewho are also active in this sector.

• The vessel subject to a sale and lease-back financetransaction, can be both a newbuilding or a second-handvessel.

Sale & Lease-back

Main / Typical Transactional documents• The Memorandum of Agreement (MOA); and• A typical ‘hell or highwater’ Bareboat Charter-party (BBC).

Typical Security Documents• A Charterer’s Assignment of the vessel’s insurances and earnings;• A Shares’ Pledge;• A Corporate Guarantee of the lessee’s parent company and / or from

the vessel’s Manager;• An Account Pledge over the Charterer’s bank accounts; and• A Manager’s Undertaking.

Parent Co.

Seller/ Lessee/ Operating Lessor

End Charterer

Leasing House

Buyer/ Lessor

Sale and Purchase / MOA

BBC / Finance Lease

Parent Company Guarantee

100% Subsidiary[100%] Subsidiary

Charter / Wet Lease

/ Purchase Option

Financial Leasing Basic structure

(and / or Manager’s Corporate Guarantee)

Sale & Lease-back

Newbuilding vs. Secondhand

• It is worth mentioning that even in a case of a new-building vessel the same structure, namely MOA and BBC,is usually applied.

• This is despite the potential availability of the – morestraightforward – alternative of the ship-owner, the buyerunder the ship-building contract, simply novating orassigning the ship-building contract towards the financingleasing house.

The Bareboat Charter-party

• The cornerstone in any sale and lease-back financing, isthe concept of a (financing) bareboat charter-party (BBC).

• The BBC will – in addition to the standard BARECON 2001clauses – contain a rider with all usual financingprovisions, similar to a traditional loan agreement.

• The BBC will usually be non-cancellable, through theinclusion of a ‘hell or highwater’ clause.

Parallel Registration

• Before proceeding with a bareboat chartering, in the context ofany lease financing transaction, a ship-owner / borrower shouldcarefully examine the flag of its preference and ensure that thesaid flag allows parallel registration.

• Registries allowing parallel registration allow ships from anotherflag, the original and / or the underlying flag, to fly their ownflag for a limited period of time on the basis of a bareboatcharter-party, namely for the duration of the bareboat charter-party.

Ship-owner – Lessee vs. Ship-owner – Borrower

Traditional Bank Financing• The ship-owner borrower retains legal title over the asset.• The lender receives interest on its loan to the borrower (plus fees).Lease Financing• There is no borrower.• The traditional ship-owner operating in the shipping market, is merely

the lessee.• The lessor, namely a leasing house / financier, not interested in

operating and trading in the shipping market, becomes the owner.

Protection & Remedies

• Overall, one could argue that a creditor being the lessor / owner of a vessel isbetter protected when compared to the position / capacity of a creditor beingmerely the secured lender.

• English law treats an owner re-possessing its (own) asset, leased to a lessee,differently from the way it treats a secured lender enforcing a security i.e. itsmortgage.

• Relief from forfeiture is an equitable doctrine which operates to protect a party(i.e. the lessee) from the forfeiture of a proprietary and / or possessory right,where the purpose of the right of forfeiture is to secure the payment of money.

• Since relief from forfeiture is a discretionary equitable remedy it is not altogethereasy to be definitive about when it would or would not be granted.

Conclusion

•Overall, sale and lease-back transactions have become awidely used feature of the global financing of ships.

• It allows ship-owners to free-up cash, improving,therefore, their liquidity, when at the same time theymay have difficulties in obtaining bank financing.

• It usually comes with a purchase option, not to sayobligation, thus, any capital appreciation throughout thelease will not accrue to the lessor alone.

Conclusion

•However, caution is required vis-à-vis:

Their varying and potentially complex structures;

In terms of legal fees they are usually more expensivethan traditional loan agreements; and

The creditor / lessor seems overall in a betterposition to attempt enforcement.

•Notwithstanding the above, sale and lease-back reflectstoday a highly developed ship-financing mechanism.

• But is it suitable for the Greek shipping sector?

Conclusion

• Following the amendment of landmark Greek ShippingLaw 27/1975, by recent Greek Law 4646/2019, bareboatchartering is now a regulated / eligible activity.

• The Greek shipping community, through the Union ofGreek Ship-owners, was fast and effective in securing an,overall, regulation of the sector.

•New Greek law 4646/2019, introduced for the first timethe notions of bareboat chartering and ship-leasing in tothe Greek Tonnage Tax System.

END OF PRESENTATION

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